Balcerowicz: Dictatorship will not lead to prosperity

05.04.2012

|Kyiv Post

When Balcerowicz delivered a keynote speech at the investment bank Dragon Capital’s annual investment conference on March 22, it was not to talk about the intricacies of monetary policy or overcoming financial crises.

In 1989, Poland was on the brink of economic collapse.

Some politicians wanted to slow down the pace of reforms, trying to ward off popular discontent. Leszek Balcerowicz, the respected Polish macroeconomist, decided the solution was to move faster.

“We have to end this false game, in which people pretend to work and the state pretends to pay them,” he said back then, when he was serving as deputy prime minister.

In academia and politics alike, Balcerowicz has not tried to candy-coat the truth, or tried to avoid unpopular measures. After three years as Poland’s finance minister and six as the central bank head, he was one of Poland’s most divisive political figures, but Poland was one of Europe’s most resilient economies.

When Balcerowicz delivered a keynote speech at the investment bank Dragon Capital’s annual investment conference on March 22, it was not to talk about the intricacies of monetary policy or overcoming financial crises.

Instead, his lesson focused on the basics: why democracy is essential to market economics and prosperity.

“There was no good example of socialism,” Balcerowicz said. “And there are very few good dictatorships.”

The professor pointed out that, barring some exceptions like Singapore, countries with a lack of freedom are unable to secure property rights and rule of law. Without this, non-politically connected businesses are unable to develop as there is no merit-based competition. In turn, such crony capitalism is a recipe for stagnation.

The speech echoed the words of Sweden’s Foreign Minister Carl Bildt, who said that as long as opposition leaders remain in jail, ratification of free trade and association agreements with the European Union would not happen. Under the current policies in Ukraine, Balcerowicz said, a free trade area agreement with the EU “will never come.”

This chimes in with recent statements by Poland’s Foreign Minister Radoslaw Sikorski, who said that pulling Ukraine out of Russia’s sphere of influence takes priority over relations with Russia. “Ukraine remains our most important non-Atlantic strategic partner. We are still ready to support it, if it really chooses a European path,” Sikorski has said.

In his speech, Balcerowicz stressed the importance of rule of law and property rights, without which a country is doomed to economic stagnation.

Without a clear separation between business and politics, the country falls into so-called crony capitalism, Balcerowicz said. This divides business into a privileged minority and an oppressed majority, “in which an individual can succeed but the economy can’t,” the chief crime from a macroeconomist’s eye.

“It’s not only unjust. It’s also inefficient,” he said.

Deputy Prime Ministers Valeriy Khoroshkovsky and Sergiy Tigipko along with newly appointed Economy Minister Petro Poroshenko were supposed to participate in a debate with Balcerowicz.

Khoroshkovsky came four hours later. By then, the Polish professor was on a flight back to Warsaw. Tigipko and Poroshenko didn’t show up at all.

They missed hearing Balcerowicz say: “When countries are poor it is often not because of natural disasters and natural reasons, but because of bad regimes and bad macroeconomic policies.”

Few are better placed to know. Author of the “Balcerowicz Plan” to reform Poland’s ravaged socialist economy after independence, he set up the system that brought the country prosperity and European Union membership.

Known as shock therapy, the plan was based on the simultaneously implementing of major economic reforms. It was a tough pill to swallow, with many lost jobs in the public sector. But an escalating debt crisis and hyperinflation, topping 50 percent a month, needed a prompt response.

“You can’t put a fire out slowly,” Balcerowicz said at the time.

It was also immensely effective. Not only was Poland the first economy to recover from the post-socialist slump, it also has the best growth record and was the only European state to escape the 2009 recession.

Looking back at the reforms five years later, Jeffery Sachs, the Harvard economist who advised many transition governments, found that the most radical reformers had “gone the furthest in restoring stability and laying the foundations for rising living standards.” Those who chose gradual reform, like Ukraine, saw only stagnation.

While political obstacles in some countries are greater than others, disparities in development are not due to cultural reasons or specific conditions, Balcerowicz asserted.

The first reason is how far countries went to implement market reforms and ensure the protection of private property rights and rule of law.

The second culprit is the extent to which economies suffered booms and busts. These can be fueled by splurging public money or excessive private credit growth, as was the case in Ukraine during the 2004-2008 boom years.

“The crash in 2009 was prodded by policies. This was not a natural disaster,” Balcerowicz said.

In a Kyiv Post interview during the Dragon Capital investment conference, Balcerowicz shared in more detail his views and concerns about Ukraine and its future.

Kyiv Post: Your speech was almost like a beginning lesson in market economics and democracy. It seems the country still hasn’t made the final shift to a market economy and democracy. Is the country caught up in crony capitalism?

Leszek Balcerowicz: So far Ukraine, according to all the information I have, is more democratic than Russia. The big question is: Is Ukraine under the current leadership going in [Russian President-elect Vladimir] Putin’s direction, or in a Central European direction? This is a very big question for Ukraine and also for Europe.

The ‘Putin direction’ is bad, both from the point of view of quality-of-life and also for the economy. The experience of Central European countries shows that you can combine a shift toward full fledged democracy and market economy without crony capitalism.

When comparing the Central European experience with that of most former-Soviet countries except for the Baltics, one of the differences is that there is capitalism but not crony capitalism. There is a clear separation between politics and business.

We don’t have the privileged minority and oppressed majority of businessmen, while in most former Soviet countries, barring the Baltics, there is crony capitalism. There is a lot of experience, including that of Latin America, which shows that crony capitalism is much worse for economic growth.

KP: In your speech, you referred to political persecutions taking place in Ukraine. How important is it for Ukraine to solve this issue?

LB: It evokes very unpleasant memories – especially in Eastern Europe – of show trials, of the [Josef] Stalin type. This is not to say that there is Stalinism in Ukraine. But the associations are like that, very vivid, and reactions are very strong.

Secondly, it’s clearly targeted in the case of [imprisoned ex-Prime Minister Yulia] Tymoshenko and [imprisoned ex-Interior Minister Yuriy] Lutsenko. It’s clearly targeted and I don’t think one can even call it targeted justice, but rather targeted injustice.

Thirdly, the claim that this is the decision of the courts is not credible. Nobody believes it. And rightly so. Personally, I don’t believe it.

Fourth, if this continues, if this targeted injustice is not reversed, I don’t see any chance for the ratification of something that is very important for Ukraine economically speaking: the Deep and Comprehensive Free Trade Agreement with the European Union. There is no chance that this will not be stopped in some national parliaments.

One should remember that Ukraine is not the only country which has been offered. Moldova is waiting, and so is Georgia.

KP: If Ukraine fails this test, could the door to Ukraine’s European future be closed for 5 or say 10 years?

LB: I don’t see any possibility that, judging by the responses I’ve read, that without the reversal of these political trials or the continuation of this sort of policy there would be any readiness on behalf of European nations to sign the treaty.

And there would be a great regret, particularly in Poland, because in Poland we are very sympathetic to the positive changes in Ukraine, because of a difficult history, and because we are neighbors and we understand that what happens in Ukraine is of geopolitical importance. An independent, democratic Ukraine is an indispensable part of the new European order, which is much better than the one that existed under the Soviet Union. What is happening in Ukraine is not only important for Ukraine, but much more broadly.

There are a lot of supporters of Ukraine, but they have been deprived of arguments because of what has happened in respect to Tymoshenko and Lutsenko. Deprived of the arguments for closer cooperation of Ukraine with the European Union, even for the most ardent supporters like Poland.

There are many of them in Poland.

And when you read what Carl Bildt said together with Radek Sikorski, that it ‘would be a political suicide to propose the ratification of the trade agreement in a national parliament’ given what has been happening.

KP: If you were the leader or prime minister of Ukraine, what would be the first 5 or 10 steps you would take?

LB: For a long time there has been a list of recommendations [of economic reforms] with respect to Ukraine. It is not a lack of advice but a lack of political will behind the policies which produce the situation I described.

I do not want to deny that for the first year and a half there were some reforms: postponing the retirement age, removing some licenses, unbundling the energy sector. But the most important fundamental weaknesses remain.

First, the unequal treatment of business and close links between favored business and power. Second, which is related to the first, limited competition. If you are a privileged businessman, you usually enjoy better protection and your competitors are discriminated against.

Third, a fiscally fragile situation related to a high level of spending to GDP, which induces waste. Why is Ukraine so dependent on Russia? Because it’s wasting a lot of energy. Even with low prices this contributes to fiscal fragility.

KP: Would you qualify Ukraine as a market economy?

LB: Certainly compared to the Soviet system it is hugely more market-based. But it is a distorted market economy because of these political connections, and this inequality produces very uneven levels of protection of private business. You also have this phenomenon of using informal ties to the state apparatus for your benefit as a private businessman – raiding. So it’s nothing normal. This is not a normal market economy.

Good competition means you win on merit not on political connections and informal links to the repression apparatus and tax apparatus.

KP: Can wealthy businessmen make good politicians?

LB: Why not? Some of them may be better than professors of economics, especially the Marxists and the Keynesians (laughing). So I would not rule it out.

The point is to be an ex-businessman; meaning that you make your money, which is good, if you make it honestly, then you retire from business, and you act in politics. But if you combine the two there is a risk of conflict of interests.

In Poland it is completely unimaginable that you could be active in big business and at the same time head a ministry or government agency. Generally in Western Europe this is unimaginable.

But being an ex-businessman or putting your business on hold, you can be even better because some good businessmen, who were good not because of political connections but because they were clever, persistent, etc., may be better than economists. They are usually more energetic and successful.

KP: One of the reasons why this system of crony capitalism persists is a sort of social pact. Ukraine spends a huge amount of money of social spending. How can Ukraine transform its social policy?

LB: First of all, social policy is anti-social in Ukraine because it’s badly targeted. If you subsidize fuel, who gets more? Rich people because they use more fuel. People who have palaces are much more subsidized as they use more gas compared to people living in small apartments.

Secondly, other types of social spending are very poorly targeted. So it is not true that this large social spending protects mostly the poor. It benefits the richer people most of all and undermines economic growth.

In order to change you should not be afraid of your own population. If you are very afraid and you postpone change, then you may end up with massive protests. This is the paradox of leaders that are afraid of their own people.

In Egypt they were afraid of removing fuel subsidies under [Hosni] Mubarak. There are huge fuel subsidies in Egypt. But this did not prevent the downfall of Mubarak because of massive protests by the younger generation, mobilized by Facebook.

KP: In Ukraine, many top officials drive the most expensive of cars, like Bentleys, even if their official salaries are very low. What car did you drive when you where in government?

LB: When I was at the central bank, we had a seven-year old but very good Audi. Back in 2001 I found it very good so I didn’t want to have a newer car. Why should I?

For a time being I had a [Soviet] Lada, but then I switched to a Toyota Avensis.

But then when I retired from the public sector, and I could earn more money – because in Poland if you work in government you don’t earn much – then (three years ago) I bought an Audi A4.